The funds are particularly susceptible to swings in prices. For instance, if a benchmark for a fund goes up 10% one day, then a 1X fund will be up 10% for that day. But if it goes down 10% the next day, it's not back to where it started. It's actually down 1%, at 99% of the original value. So swings remove value and leverage makes it worse.
"Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets,'' FINRA said, in Regulatory Notice 09-31.
The result, Rawson notes, is that institutions and long-term asset managers have backed off. No pension funds put their money into these instruments.
They are used instead by day traders, who hold them for roughly two days, then get out. "They get a lot of bang for the buck,'' he said. But "investors have really pulled out." Indeed, Brigandi, said "these products aren't for everyone. They're niche products."
Who do they target? "The fast money crowd, looking to get in and out quickly,'' he said, which he said included high-frequency traders and day traders.
Where the roughly $29 billion held in inverse and leveraged funds amounted to 4% of assets in all exchange-traded funds three years ago, the assets have not climbed. And the share has fallen to 2%, as ETFs in general gained ground, rapidly.
But ProShares was upheld in early September when a U.S. District Court ruled that the firm adequately disclosed in registration statements the risks associated with holding leveraged and inverse ETFs for periods longer than one day.
